Archive for the ‘UK House Prices’ Category

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Is “Mortgage Stickiness” holding up property sales?

January 24th, 2011

The term “Mortgage Stickiness” describes the situation where a property owner has a mortgage product that they want to keep, typically because the mortgage is a fantastic deal that they cannot expect to improve upon, or it may be their financial situation has weakened and thus its unlikely they will be able to get another mortgage.

The current market has left up to 50% of residential mortgage holders with products that track bank base rates at 1% or 2% over base rate, in some case less than 1%.  In effect these mortgage holders have a huge disincentive to move property because if they did the new mortgage would have a much higher long term interest rate (some products offer initial low rates but the longer term rates are typically 3% or 4% over bank base rate). 

The effect is that someone with an average mortgage of around £140,000 (BBA statistics) could see interest charges increasing from £233 pcm (2%  rate) to £466 pcm(4% rate).  For many people this is a huge disincentive to move.

The other factor is those whose financial situation has changed, or maybe the more recent strict mortgage rules man they can no longer get a mortgage (some self employed may fall into this category).

No one knows for certain but it is clear that a very large percentage of property owners are effectively in a trap, they have a “sticky mortgage”, it would simply be too expensive to move to a new mortgage, effectively leaving them with no option of moving property.

This then takes us to our last point.  With a large proportion of the property market (up to 50%) trapped in this way we have a situation where there is insufficient property coming onto the market.  Perhaps this is a good thing short term as it helps to stabilise property prices?  However if the BofE starts to increase bank base rates too fast we could see a major shift, many will no longer be held back by their existing mortgage which will become more comparable to new mortgages on offer.  This could create a step change in market supply and create some interesting dynamics for property prices.

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Are house prices set to surge?

January 18th, 2011

According to a news article published in the Express today there are expectations of a house price surge in spring 2011.

But it all depends what is meant by “surge”.  The article does not give any predictions, its focus is more on the balance of opinion amongst surveyors that prices will increase this spring. 

One of the factors given for the spring increase is a shortage of quality housing available for sale.  Thus it only takes a small increase in demand, when combined with shortage of supply, for prices to increase.

The fact is however that houses prices tend to follow a seasonal pattern in that spring is traditionally a period where prices rise (relatively).  But in a declining market as we have seen recently a rise in prices this spring will correct the falls over the winter, the real question is will prices increase over the full year of 2011? 

A longer term sustainable increase in property prices may still be some time away as there are many factors at play here.  If you would like to read more about factors that influence property prices read our 2009 article on house price predictions.

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Falling property prices and increasing rents?

January 7th, 2011

It may seem an unusual combination but there have been increasing reports of property prices falling and at the same time increases in rents. Why is this the case and can it continue?

Firstly it is worth looking at rental yields.  Over the last 5 to 10 years rental yields have fallen to a level where for much of the South East UK a yield of 5% was typical (although yields where higher in some areas such as North East UK).

In part the low 5% yield was down to property prices being driven upward whilst at the same time the rental market was effectively capped by affordability, thus as house prices increased rental yields fell.

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Now we have a situation where the recessionary impact on rents has eased allowing rents to increase in some areas.  At the same time property prices have fallen.  The upshot is that rental yields of 6% are now becoming more common in the South East.  But what about the longer term?

In the medium term there will be some negative impact on rents due to housing benefit changes but there are longer term upward pressures on rents, in particular two;

  1. Mortgage financing is becoming more difficult, and with international agreements for banks to increase liquid assets (Basel III) this shows no sign of abating. This could mean an increasing proportion of the UK population turning to tenancies rather than home ownership.
  2. There is a growing UK population which is not being matched by an increase in new homes being built.  This will create an increased demand for housing and thus tenancies.

The upshot is in the medium term there does seem to be a trend of falling house prices and increasing rents.  But in the longer term property prices will start to rise but we will probably see improved rental yields compared with the last decade.

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Posted in Buy-to-Let, UK House Prices

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Will property prices fall again?

November 10th, 2010

This is a question asked by many, and whilst there is no clear answer there are certainly some factors coming into play. 

1 – The growth in the global economy.  Many local economies, such as the UK, depend very much on global economic growth.  The negative factor coming into play here is the trade protectionism which could damage UK economic growth and with it impact UK property prices.

2 – Finance availability.  There is an increasing requirement for banks to improve their liquidity which in turn restricts what they have to lend.  The upshot is less finance for mortgages means it becomes even harder to buy a property.

3 – Rent capping for those on benefits.  Whilst many would agree with the UK approach here it should have a medium term impact as reduced market rents will reduce values for buy-to-let properties in some areas.

4 – Increased unemployment.  It is now becoming much more clear as to the effects of the austerity measures and the increased unemployment that will result.  The net effect of this will again be to put downward pressure on property prices.

Above are just some of the factors, but it starts to paint a picture, the balance seems  to suggest the there will be downward pressure on property prices in the medium term.

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Posted in UK House Prices

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Predicting property prices in 2010

February 26th, 2010

Nationwide have just announced a 1% fall in property prices for February 2010, this is after a period of over 9 months with reported increases, so what is happening, what is the prospect for property prices in 2010?

We have previously blogged about the weakness of the property market and that we are not in a normal market where any increases or decreases can be taken as predictors for future prices.  The fact is the volume of property sales is well below historical averages, this lends itself to more unpredictable property prices.

Other factors also come into play, in particular the restoration of stamp duty thresholds on 1st January 2010.  Such changes in an already thin market have a more pronounced effect on property prices.

But key for most of us will be future property prices.  Unfortunately it is tough to predict, as we highlighted in our blog post about property prices in October last year.  The key factor for 2010 will be the election, who gets in power and what actions will they take to address the UK’s economic issues.  Whilst we are not in the same precarious situation as Greece we do have challenges to face, and how we face them will impact property prices.

So, back to the heading of this post, predicting property prices in 2010.  The fact is this year will probably be one of the most difficult to predict, because we have so many unknowns with the pending election.  Our best guess is that prices will be relatively flat in 2010, some months of increase, some of decrease.  Time will tell!

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Posted in UK House Prices

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Future house prices – beware

January 4th, 2010

A reason why we should be more cautious regarding recent house price increases and what this could mean for future house prices.

Acording to the  Council of Mortgage Lenders (CML) around two thirds of residential mortgages are linked to bank base rates, e.g. “tracker” or “variable rate” mortgages.  After the sharp fall in SVR and tracker rates over the last year the vast majority of these mortgage holders will be paying less than 3% on their mortgages, in some cases closer to 1%. 

And here is the dilemma …

You would like to move home but it means getting a new mortgage, and in the current market this means mortgage rates higher than 3%.  In effect anyone moving home would end up paying more on the new mortgage even if they borrowed less money!

Here is an example …

Homeowner has a property with a £150,000 mortgage on a base rate + 1% tracker.  Their actual mortgage interest payments are currently £2,250 p.a.  BUT if they move and take out a £150,000 mortgage on their new property the mortgage rate would double to at least 3%, making their interest payments £4,500 p.a. And even if they took out a £100,000 mortgage it would still cost them £3,000 p.a., that it £750 p.a. more than their original £150,000 mortgage!

So what we have here is a false property market where prices are increasing due to the shortage of properties available (many analysts have already made these comments).  When base rates get back to “normal”, e.g. 4% or higher the differential on new mortgages will largely disappear, e.g. a new mortgage should then be similar to existing trackers of base rate + 1.5%. 

The key question is this, when people are no longer constrained by the increased mortgage costs of moving will we find a surge in properties for sale and thus a fall in property prices as supply starts to exceed demand?

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Posted in UK House Prices

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Property market – house price recovery on the way?

December 14th, 2009

The new build market has seen some increased activity with prices rising to reflect increased demand. For October 2009 new build prices were reported to have increased by 1.3%, but is this a sign of recovery?

Looking at other data sources suggest there is some cause for optimism with mortgage approvals for buy-to-let investors increasing. In Q3 of 2009 the number of buy-to-let mortgages approved totalled 23,700, and increase of 9.7% over Q2. That said mortgages approved are still at historically low levels.

The key indicator for buy-to-let mortgage approvals is investor sentiment, the increase in investment activity for the buy-to-let market suggest that investors are starting to see the residential property market as a good place to invest.

Whilst these are positive signs there is also reason for continued caution. We have yet to see the economic effects of “budget cuts” after the 2010 general election. An increasing number of commentators are predicting a slump in 2010. This sentiment is captured in a statement from Howard Archer, an economist at HIS Global Insight: “… the firming of housing prices seen since March / April will fizzle out before long and house prices will suffer a relapse in 2010.”

Our view is that as an investor focus on the net rental yield from a property to generate cash flow in excess of the mortgage costs. As long as a property is making a rental profit then you can ride out fluctuations in property prices. If you are buying for capital gain, then the signals suggest extreme caution for 2010.

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Posted in UK House Prices

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Are house prices going to start falling?

December 1st, 2009

A question we would all like to know the answer to however the fact is no one knows for certain, but there are some signs of caution suggesting a fall in house prices is possible.

Firstly builders have been offloading stock at discounts, it may be that their liquidity position requires them to raise cash quickly, but it could also be that some may see the market getting a little difficult in the coming months.

Many banks also introduced stricter lending criteria at the end of November, some of the best-buy fixed rate deals were withdrawn and replaced with new products at a higher rate of interest. RBS also increased the deposit requirements on its key tracker product (currently with a rate of 2.89%) from 20% to 25%.

Some views coming from analysts are suggesting that the banks do not have confidence in the property market and some are now anticipating a “double dip” in house prices in 2010. Interestingly the Nationwide’s Chief Executive (Graeme Beale) was quoted as saying “The growth in house prices over recent months appears to be driven by lack of supply” and further … “growth in unemployment throughout 2010 will inevitably exert downward pressure.”

Going back to our heading, are house prices going to start falling? Our view is that it is likely we will see a fall in house prices in the coming months, but in the medium term we feel the market will start to recover on a more permanent basis.

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Property prices rise 1.2% in October – according to Halifax

November 4th, 2009

The latest figures form Halifax report a fourth consecutive monthly increase in property prices of 1.2% in October, this compares with a 0.4%increase for October reported by Nationwide.

But it is the comments behind these headlines that are interesting….

Halifax’s housing economist, Mark Ellis, also raised caution that much of the recent increases are because there are too few homes on the market to meet demand.   Mr Ellis also commented that there are some indications that more people were deciding to put their homes on the market which would curb the rate at which property prices are increasing.

The Chief Economist of HIS Global, Howard Archer, commented that you can’t place too much store on one survey and that you need to look at the whole picture.  In particular Mr Archer commented that “I just don’t think the economy is strong enough to sustain these increases”.

Overall the message here seems to be that caution should be applied to the reported increases in property prices and that we are still in a fragile economy.

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Property market outlook is fragile

October 30th, 2009

The summer of 2009 has seen monthly reported increases in property prices, the reality is however we are in a thin market, that is to say property sales are still very low compared to historic averages. So what is the property market outlook? To help answer this question it is probably wise to consider feedback from the industry “experts”….

According to the Bank of England a total of 25,528 mortgages were approved for lending in September 2009, as fall of around 9 percent on August.  This is well down on the historic trends.

A respected economist, Howard Archer (HIS Global Insight), suggests that to stabilise the house prices we need to see between 70,000 and 80,000 mortgages approved each month.  Further the research identified that between 1993 and 2009 the average number of loans approved was 93,000 each month.

The Building Society Association (BSA) also reported that whilst “lending activity has recovered in recent months” the overall level of lending is still at levels “much below” that of previous years.

Other economists and analysts such as Seema Shah of Capital Economics suggest that there is much further to go before “lenders have the financing capabilities to loosen lending criteria meaningfully”.

Overall there seems to be a general view that we are not yet into the recovery phase of the property market, conditions are fragile and are likely to remain so for some time.

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